Agglomeration’s impact on product quality has received much less attention than its impact on productivity, despite the importance of quality as a precondition for economic development. This column employs plant-product-level data from Japanese manufacturing to assess the effects of urban agglomeration on product quality. The findings suggest that state and municipal tax breaks, and other public efforts to attract enterprises, enhance economic competitiveness by improving product quality along with productivity.

The international competitiveness of industries has received much scholarly attention, but this research has tended to focus on Europe and North America. This column examines the competitiveness of industries in six Asian countries. Global value chain income is increasing in China, India, and Indonesia. And unlike workers in EU countries, workers in the Asian countries have benefited from this increased competitiveness.

Internal devaluations have been suggested as a possible policy option for countries in a currency union facing large external deficits. These policy actions seek to restore competitiveness by replicating the outcomes of an external devaluation. This column examines wage moderation as a potential means of internal devaluation for EZ countries. If pursued by several countries, wage moderation can work if monetary policy is not constrained by the zero lower bound, or if supported by quantitative easing. Without sufficient monetary accommodation, it will not deliver much of a boost to output, and may hurt overall EZ output.

While Brazil has become one of the largest economies in the world, it remains among the most closed economies as measured by the share of exports and imports in GDP. This column argues that this cannot be explained simply by the size of Brazil’s economy. Rather it is due to a reliance on domestic value chain integration as opposed to participation in global production networks. Greater trade openness could produce efficiency gains and help Brazil address its productivity and competitiveness challenges.

The link between public- and private-sector compensation has important implications for the labour market and price competitiveness. This column reports that manufacturing and government wages co-move both in the long and short run, but that the long-run co-movement is much stronger where the government is an important employer. This co-movement tends to break down during fiscal consolidation periods, except in large-government countries. Moreover, manufacturing wages exhibit a stronger co-movement with productivity in countries where government wages are set via collective bargaining.

One common measure of trade linked international production networks is the so-called VAX ratio, i.e. the ratio of value-added exports to gross exports. This column argues that this measure is not well-behaved at the sector, bilateral, or bilateral sector level, and does not capture important features of international production sharing. A new gross trade accounting framework is proposed that can better track countries’ movements up and down global value chains.

External imbalances within the Eurozone grew substantially between the introduction of the euro in 1999 and the global financial crisis of 2008–09. Using new empirical evidence, this column argues that imbalances in the Eurozone periphery were mainly driven by a domestic demand boom, triggered by greater financial integration, with changes in the periphery’s competitiveness playing only a minor role. Internal devaluation may thus have been of limited effectiveness in restoring external balances, although better external competitiveness may eventually boost medium-term growth.

Since the mid-2000s competitiveness indicators for Italy have been providing conflicting signals. This column argues that producer prices and labour costs have actually moved hand in hand since 1992, and that the rise in the real effective exchange rate based on labour costs can be attributed to price-cost divergences in its main trading partners. Due to the internationalisation of production processes and fading share of labour in overall costs, price-based indicators may be more appropriate to assess external competitiveness.

It’s currently very trendy in Italy to blame Angela Merkel, Mario Monti, and austerity measures for the current recession. This column argues that while the severity of the downturn is clearly a cyclical phenomenon, the inability of the country to grow out of it is the legacy of more than a decade of a lack of reforms in credit, product and labour markets. This lack of reform has suffocated innovation and productivity growth, resulting in wage dynamics that are completely decoupled from labour productivity and demand conditions.

Will addressing large internal imbalances lead us out of the Eurozone crisis? This column argues that it might. Periphery countries should devalue in order to regain competitiveness and reduce imbalances. As to whether they should pursue internal or external devaluation, the answer remains unclear. Overall, given that policymakers have excluded the option of exit, economic policymaking must focus on the possibilities for internal devaluations, despite some of the difficulties it may bring.

Brazilian exports of goods and services have grown sharply in recent years, tripling since 2000. This column argues that Brazil’s export performance depends mostly on favourable geographical and sector composition effects and that a recent slowdown in industrial exports, production, and investments are not related to insufficient demand but rather supply-side inefficiencies and rising costs. Policymakers ought to aim for urgent progress on the nation’s microeconomic reforms agenda, an increase in the investment-to-GDP ratio, and improvements in human capital.

Why is it that large movements in exchange rates have small effects on international prices? What does this mean for a crisis-stricken Eurozone? Using firm-level data, this column presents new research that investigates this exchange rate ‘disconnect’. Evidence suggests that the prices of the largest firms – with their disproportionately large share of trade – are insulated from exchange rate movements. The international competitiveness effects of a euro devaluation are therefore likely to be modest, given major exporters’ reliance on global supply chains.

With the rise of complex, globalised supply chains is the real effective exchange rate (REER), the most commonly used measure of competitiveness, now outdated? If it is, what should replace it? This column presents a ‘Value-Added REER’ and shows that it differs substantially from the conventional REER. Because it is possible to construct a new Value-Added REER from existing data, policymakers interested in improving their understanding of competitiveness might well consider including it in their toolbox.

How can we explain the ‘Spanish paradox’ – a modest market share loss since the launch of the euro alongside a real exchange rate appreciation? This column argues that the non-price determinants of competitiveness have been more important than export prices in explaining the change of world exports shares. Notably, Spanish firms’ strategic decision-making has helped shape Spain´s internationalisation and may, ultimately, be the crucial factor explaining the paradox.

Competitiveness is one of the most debated issues in policy circles. But, what triggers it? Capitalising on the first existing harmonised cross-country dataset measuring the entire range of international activities of firms in seven European countries, this column identifies the triggers of competitiveness. It argues that policymaking could be improved by firm-level evidence if there were less reluctance to the use of micro-founded indicators to inform policy decisions.

The escalation of the crisis in the Eurozone calls for new measures to reduce yields on Spanish bonds. This column succinctly lays out the options and finds them wanting. It argues that sovereign bond purchases might not be sufficient to reassure investors. A credible solution will also require a coordinated strategy to address Spain’s competitiveness problem.

The forefathers of Europe’s single currency argued that rather than devalue their currencies to restore competitiveness, countries could devalue ‘internally’. Against the current of bad press, this column presents a novel way of recording competitiveness and argues that Ireland, Spain, Latvia, and Lithuania have all managed these adjustments – but not without paying a huge toll in jobs lost.

Are emerging markets a threat to jobs and competitiveness for the industrialised countries? This column argues that such concerns are often based on myths. Armed with the facts, policymakers in mature economies should focus on the opportunities emerging markets present rather than viewing them as a threat.

One of the key problems in Europe is the lack of competitiveness. With this in mind, this column presents a report looking at how European firms responded to the global financial crisis of 2008 and 2009 and finds lessons for today’s troubles. Chief among them - there is no one-size-fits-all solution.

American policy discourse is notoriously preoccupied with the country's loss of competitiveness. This column argues that these fears are misplaced. Instead, faulty fiscal policies are to blame for the perception that the US has lost its edge.

20 - 21 August 2018 / Goethe University Frankfurt / Central Bank Research Association (CEBRA) and the Research Center SAFE (Sustainable Architecture for Finance in Europe) at Goethe University Frankfurt